Chapter 19 Macroeconomics

Exchange rates

Prices at which currencies trade

If real interest rates in the United States are higher than those of our trading partners, what will tend to happen to the foreign exchange value of the dollar and the U.S. current account deficit or surplus?

The dollar will appreciate; the current account will move toward a deficit.

Fixed rates

The value of a nation's currency is determined by its own central bank. The central bank works to hold the exchange rate in place, mainly through the purchase and sale of national currency. Unchanged, fixed.

Floating rates

Under a flexible (floating) exchange rate system, the exchange rate is determined by supply and demand

Under a system of flexible exchange rates, an increase in demand for a nation's currency in the foreign exchange market will

cause the nation's currency to appreciate.

If the dollar price of the euro goes from $1 to 90 cents, the euro has

depreciated, and Europeans will find U.S. goods more expensive

A nation's trade deficit will tend to expand when

its economy is expanding.

A depreciation in the value of the U.S. dollar would

make it more expensive for U.S. citizens to travel abroad.

Under a system of flexible exchange rates, which of the following will most likely cause a nation's currency to appreciate on the foreign exchange market?

stable domestic prices while the nation's trading partners are experiencing 10 percent inflation